OREANDA-NEWS. Fitch Ratings has placed 48 U.S. RMBS classes on Rating Watch Positive in anticipation of potential future upgrades related to pending payouts from the $8.5 billion Countrywide/Bank of America settlement. A spreadsheet detailing Fitch's rating actions can be found at 'www.fitchratings.com' by performing a title search for 'U.S. RMBS Rating Watch Positive Actions for July 28, 2015'.

KEY RATING DRIVERS

The Rating Watch Positive designations reflect the potential for increased credit enhancement (CE) resulting from payments from the pending settlement. Each trust's share of the $8.5 billion settlement is expected to flow to the bond holders per the transaction's principal waterfall, as if the payout were a large prepayment. In general, outstanding senior classes are expected to receive the bulk of the principal payments, reducing their balances. Certain subordinate classes that have incurred writedowns to date are expected to have their balances written back up, thus increasing the credit enhancement of all classes they support.

The $8.5 billion settlement payout is to be allocated pro-rata among the 530 subject trusts based on each trust's expected lifetime losses. To estimate the payout amount each trust will receive, Fitch used its U.S. RMBS Loan Loss Model to project future losses on each outstanding pool, and added in realized losses to date. Fitch estimates that each deal will receive a settlement payment roughly equal to 10% of its expected lifetime losses.

Rating Watch Positive designations were determined by comparing each class' projected post-settlement CE to projected pool loss expectations for each rating stress.

Fitch has outstanding ratings on only 203 of the 530 transactions included in the settlement. Of the roughly 3,000 classes included in the settlement that Fitch actively rates, 74% have incurred principal writedowns to date, and are currently rated 'Dsf'. These already-defaulted classes were not considered for placement on Rating Watch Positive. While the settlement payouts are expected to improve the recover prospects for many defaulted classes, it is unlikely that Fitch would upgrade such classes above 'Dsf' because the lost interest to date related to the writedown is not expected to be recovered.

BACKGROUND AND TIMING

On June 28, 2011, Bank of America Corporation (BAC) and Countrywide Home Loans, Inc (CHL) reached a settlement with Bank of New York Mellon (BNY) as trustee, representing 22 institutional investors, regarding alleged breaches of representations and warranties and violations of servicing obligations. Per the settlement, BAC - which purchased CHL in 2008 - is to make a payment of $8.5 billion to BNY, as trustee for 530 Countrywide RMBS trusts. The settlement also calls for BAC to implement a number of servicing improvements.

The settlement payout is contingent on both court and tax (IRS and state) approval. After nearly four years, court approval was received in April 2015 from the New York Supreme Court. Tax approval has been requested by BNY but has not yet been received. Once tax approval is received, a trustee-appointed third party expert has 90 days to determine each trust's allocation of the settlement payout, and BAC has 120 days from the tax approval date to make the payments to the trusts.

If tax approval is received within the next month, the trusts could receive the payments by the end of the year. However, if there are further delays in the IRS approval process, the payouts will likely not be made until 2016.

Fitch will continue to monitor the progress of the settlement. After the settlement's payments are made, Fitch will conduct a full analysis of all affected Fitch-rated classes - including those not placed on Rating Watch Positive - for potential rating implications and recovery estimate revisions.

RATING SENSITIVITIES
Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.

In addition to increasing mortgage pool losses at each rating category to reflect increasingly stressful economic scenarios, Fitch analyzes various loss-timing, prepayment, loan modification, servicer advancing, and interest rate scenarios as part of the cash flow analysis. Each class is analyzed with 43 different combinations of loss, prepayment and interest rate projections.

Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.

The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.